All You Need To Know About Tax On Savings Bank Account Interest

Income Tax

As the name suggests, a savings account is meant to encourage people to save money and deposit their funds safely with a bank. It is an interest-bearing deposit account that allows you to earn a modest interest income and withdraw the funds whenever you want. 

Banks set an interest rate on the money you deposit and allow you to establish a regular source of income. However, like every other source of income, you have to pay tax on savings account interest.

Fortunately, to incentivise depositing money in this virtual vault, the Government of India offers tax deductions on this interest income. 

How to Calculate Interest on a Savings Account?

As per the Reserve Bank of India guidelines, the calculation of interest on a savings account is done on a daily basis. The interest rate set by the bank applies to the closing balance you have at the end of the day. 

Based on the type of account, the transfer of this interest amount takes place on a monthly, quarterly or half-yearly basis. RBI suggests banks make this transfer quarterly to stimulate the need to save money. 

You can calculate savings account interest by using this simple formula:

Interest = Daily closing balance x Rate of interest x Number of days / Number of days in a year

Let’s say Rahul has a daily closing balance of Rs. 2 lakh for the month of June. His bank offers him an annual interest rate of 5%. Rahul will earn a monthly interest of —

2,00,000 x (5/100) x 30/365 = Rs. 821.91 per month

Also Read: What Are The Different Types Of Taxes In India?

Taxation of Interest Earned on Savings Account 

The interest earned by depositing money in a savings account falls under the ‘Income from other Sources’ category. Thus, an individual has to pay tax on this interest according to their income tax slab. However, you will have to pay this tax only if the interest amount is above Rs. 10,000.

Moreover, as per Section 19A of the Income Tax Act, one does not have to pay TDS on Savings Account deposits. But for interest earned on a Non-Resident Ordinary (NRO) Account, one will have to pay a TDS of 30%. Meanwhile, there is no TDS on interest from ​​Non-Residential External (NRE) Account. 

Tax Benefit on Savings Account Interest 

Apart from offering regular passive income, one of the major benefits of opening a Savings Account is the tax benefits. To help reduce your taxable income, Section 80TTA and 80TTB of the Income Tax Act offer tax deductions on the interest income. 

• Section 80TTA

The Government of India introduced Section 80TTA of the Income Tax Act for the financial year 2012-13. This section enables citizens who receive interest on a savings account to obtain tax deduction of Rs. 10,000. This deduction is over and above the Rs. 1.5 lakh rebate under Section 80C of the Income Tax Act. 

However, to qualify for this deduction, you need to fulfil the following conditions: 

1. It is only available for individuals and Hindu Undivided Families who are less than 60 years old. 
2. Firms, Body of Individuals, Association of Persons, and Company Assessees are ineligible to claim deductions. 
3. The deduction applies to the interest that one earns from a savings account with a bank, cooperative bank, or post office. 
4. If you have more than one savings account, the maximum deduction remains Rs. 10,000. 

Meanwhile, deduction under Section 80TTA does not apply to the following:

1. Individuals or HUFs above the age of 60. 
2. Interest accrued on fixed deposits, term deposits or recurring deposits. 

• Section 80TTB 

After the age of 60, one requires more money in hand to enjoy a secure retirement. Thus, for senior citizens and pensioners, the Government of India allows a tax deduction of up to Rs. 50,000 on savings account interest. 

However, there is a key distinction between Section 80TTA and Section 80TTB. The latter offers deduction on interest on savings Account, fixed deposit account, term deposit account, etc. Meanwhile, the former only allows one to claim tax deduction on interest accrued on savings accounts. Nonetheless, the deduction is available for only individuals and Hindu Undivided Family (HUF), excluding senior citizens. 

Also Read: Tax Saving Options other Than Section 80C Of The Income Tax Act

Final Word

In today’s modern banking world, a savings account is the most preferred and widely used bank account to park one’s savings. It does not just keep your funds safe, but it also offers interest on the money deposited. Moreover, the tax on savings account interest is available for deduction under Section 80TTA of the Income Tax Act. 

Frequently Asked Questions

1. Can I avoid paying tax on savings account interest?

To lower your taxes and increase the overall income you take home, the Government of India offers various tax deductions. Under Section 80TTA and 80TTB of the Income Tax Act, you can avail a deduction of up to Rs. 10,000 and Rs. 50,000, respectively. However, you cannot fully avoid paying taxes if you earn savings account interest of more than Rs. 10,000. 

2. How much savings bank account interest is tax-free?

Under Section 80TTA of the Income Tax Act, one does not have to pay any tax if their total interest income is not more than Rs. 10,000. If the amount is above the tax limit, one will have to pay taxes as per their income tax slab. 

3. Can an NRI claim tax deduction under Section 80TTA of the Income Tax Act?

Non-resident Indians can claim tax benefits under Section 80TTA on interests accrued on a savings account. Moreover, interest earned on NRO accounts is subject to tax deduction at source at 30%. However, NRIs cannot claim tax deductions under Section 80TTB of the Income Tax Act. 

4. What is TDS?

Tax Deducted at Source (TDS) refers to the amount deducted directly from a deductee’s source of income when a payment is made to the individual, like rent, salary, interest, etc. Through this provision, the Government of India ensures that the tax deduction takes place in advance. 

5. I have three savings accounts. How much tax deduction can I get on the interest?

The maximum tax deduction on interest on savings account under Section 80TTA of the Income Tax Act is Rs. 10,000. This is a fixed collective limit that remains unchanged, regardless of how many savings accounts one might open.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.